By Eli, Melody
Reflation trades fade as divided government becomes the base case.
Joe Biden won, but he certainly didn't hang a 10 on a Blue Wave. The republicans seem to have held onto their Senate majority, results from Tuesday's election significantly lowered the odds of a unified Democratic sweep.
There is only a 20% chance of a Democratic Senate(down from nearly 60% heading into the election). As a result, institutional pros outflowed several trades that had hinged on an election-driven reflation theme, given the likelihood of smaller fiscal stimulus.
Now the market is expecting a materially smaller Phase 4 fiscal deal(less than $1 trillion versus the $2.5-3 trillion possible on a Democratic sweep) and limited expansion in longer-term priorities such as infrastructure.
Moving forward, markets are likely to trade with a divided government baseline while news on the public health trajectory and vaccine development should take over as a key driver for markets into year-end.
So, expect market would be more cautious in reprising that anticipatory repricing this time around that at least to year-end!
Notable bettings toward broader market indices ETF on 11/6
Market-wide option volume of 33.7m contracts was 18% above recent average levels, with calls leading puts 14 to 9. Single stock and Index products saw relatively heavy volume, while ETF flow was moderate.
Individuals breakdown by sectors (11/6 notable bets)
Most active sectors included Health Care, Consumer Goods and Basic Materials while Industrials and Telecommunications were relatively light. Of the 3,616 stocks with listed options, 1,204 (33%) closed higher, and 2,166 (60%) lower. Among the 500 most liquid single stocks, 30day implied volatility was lower for 344 and higher for 116.
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